\begin{abstract}
  Energy is an essential input to many economic activities and is one
  of the sectors that directly connects to national security. In
  addition, there is an extensive ongoing policy discussion in the
  United States about innovations in the green economy and their
  potential to act as a new engine of economic growth. Given the 
  substantial production subsidies at the federal and state level for
  the renewable energy industry in the past few years, it is important
  to have such policies evaluated.

  The justifications often put forward for subsidizing renewable
  energy are environmental externalities and learning-by-doing from
  the production of renewable energy. In this paper, we show that
  technological externalities in the energy sector lead to inefficient
  outcomes of the economy and allow for the probability that government intervention could improve upon market outcomes.

  In a previous working paper (Hartley et al. 2012), we developed a
  dynamic general equilibrium model with learning-by-doing effects to
  study the Pareto optimal energy transition path from fossil fuel to
  renewables. In this paper, we develop a decentralized version of the model and show that the same Pareto optimal
  solution could be found in a competitive market economy. Then we modify the knowledge accumulation function to allow for  technological externalities associated with R\&D and
  learning-by-doing. We show that this may provide some valid arguments for believing 
  government action could improve private sector outcomes.

The main results we find are:
\begin{enumerate}
\item  Knowledge spillovers lead to sub-optimal solutions: lower
investment in R\&D, slower technological progress, and lower
output and consumption.  
\item  With knowledge spillovers, the fossil fuel regime of the economy lasts a longer time but with fewer fossil fuels being consumed. The economy also experiences higher energy  prices during the transition period
\item  Compared to learning-by-doing spillovers, R\&D spillovers lead to a more severe under-investment problem and retard the economy more.
\end{enumerate}
\end{abstract}
